VIDEO: Reg D Restrictions Lifted!
In this Compliance Clip (video), Adam takes a brief look at the recent interim final rule from the Federal Reserve which lifts the requirement to monitor for excessive transactions on savings deposits. Adam even gives a brief overview of why this was done and explains the monetary policy behind all of these changes. While economics and compliance typically don’t mix, hold on for a slightly extended video of excitement and danger… or maybe just a good overview of the changes.
The interim final rule can be found here.
For those interested in more information on these Reg D changes, we covered this topic in our Spring 2020 Quarterly Compliance Update, found in our store here.
Video Transcript
The following is a transcript of this video.
This Compliance Clip is going to talk about some new rules that relate to Regulation D and these are exciting because some restrictions have been lifted for financial institutions, especially on the deposit side of things.
What's happened is we have seen quite a few changes take place over the last year and several months. This all goes back to January of 2019, when the Federal Reserve announced that they were going to change their monetary policy. So regulation D has always been used for monetary policy. So this goes back to 2019 when the Federal Reserve said they're going to move to an ample reserve regime. To understand what an ample reserve regime is, we have to understand what was in place prior to this ample reserve regime. What was in place prior to this was a limited reserve regime and what this relates to is the reserves that banks have on hand. So what we had up until this new regime, prior to 2009 and the financial crisis, is we saw the financial institutions operated with very limited reserves, unless they were told by the Federal Reserve that they had to have more reserves. Naturally, financial situations had limited reserves. So as part of their monetary policy for years, what the Federal Reserve did is they required financial institutions to have a certain amount of reserves on hand for their financial institution. They required this through Regulation D and it had to do with their monetary policy, has to do with savings accounts and reserve requirements and everything else that goes along with that.
What they said in 2019 was that they'd been watching this for years and they realized the way the bull curve is at is that they've been operating under an ample reserve regime, where basically the market is helping drive this natural progression towards financial institutions having reserves. Really, the short story to this is it comes down to the Federal Reserve pays interest now on reserves so that gives banks and financial institutions incentives to have money on reserves as part of their strategy in holding and liquidity strategy and everything else. So they shifted this policy and that happened in 2019.
With the financial crisis, what happened on March 15, 2020 was the Federal Reserve eliminated reserve requirements that essentially eliminated the need to differentiate between transaction accounts and savings accounts. Essentially, now that there's no reserve requirements, as financial institutions, it really seems irrelevant to have to differentiate between transaction accounts and savings accounts, which is what the Fed used in their prior monetary policy with that limited reserve regime. Initially, we had a lot of questions come in and say, basically, people were saying, wait a second, now that we don't have to have reserve requirements on our transaction or savings accounts, what's the point of monitoring these restricted transactions on Regulation D? Do we still have to do that? What the Federal Reserve initially did is it released a Frequently Asked Question that basically said Regulation D monitoring must continue. It must continue, and you have to stick with it.
A couple of weeks ago, we released a video talking about this, saying that monitoring must continue. Well, on Thursday, the 23rd or Friday, the 24th, the Federal Reserve announced a rule that was released in the Federal Register on April 28th. So on April 28th, when the Federal Register was released, which was actually effective back on the 24th, I believe, what happened was the Federal Reserve came back with new guidance and said that they have an interim final rule that's effective immediately, where financial institutions can stop, really the word they used is suspend Reg D monitoring, and the requirements that were previously in place under Regulation D. What they have done is they suspended these requirements. So financial institutions no longer have to monitor for excessive transactions on savings accounts if they don't want to, you can if you want to, but you don't have to.
There's a lot of little moving parts in this, as far as how you report this on your <inaudible> report, and there's questions as to whether or not this is temporary and quite a few little kinks. I will tell you the bottom line is that you can stop monitoring this now, if you choose to. You can continue if you choose to, but you can stop monitoring for these excessive transactions if you choose to. I would probably just leave everything else alone. I probably wouldn't change my disclosures. I would probably wait till the final rule comes out because this is an interim final rule. There'll be a comment period, and then a final rule. I would just, if I need to, stop monitoring these excessive transactions now but leave everything else in place. And when the final comes out, then we’ll decide, because what we have to determine is whether or not we believe the Federal Reserve is going to go back to their monetary policy and whether their current monetary policy of an ample reserve regime is going to hold up in relationship to what's happened with COVID-19 and the current pandemic. So, kind of have to look at economics here to determine what we need to do with our financial institutions.
There was some guidance that was released, a number of frequently asked questions, and we actually go through all the Frequently Asked Questions, in detail, in our Spring 2020 Quarterly Compliance Update that we just released this week.